What Are Bitcoins?

by Grey One • October 12, 2012

Bitcoins a type of money that can be freely sent over the internet to anyone in the world, in any amount big or small, without any middleman (peer-to-peer). Unlike US Dollars, whose value is diminished by the government printing more dollars every day, Bitcoins are created at a predictable and known rate by individuals all over the world. It is impossible to make a counterfeit Bitcoin and there will only be a finite number ever created. No one person controls Bitcoin and therefore no one can control what you do with Bitcoin. All of these qualities add up to make Bitcoin a solid platform for both saving and spending money.

Bitcoin is new, and like any investment, it comes with its own risks. A year ago, one Bitcoin was worth about $4. The value of one Bitcoin today is worth $13.63 with the total market capitalization of all Bitcoins just over $140 million. But Bitcoin is still in its infancy, and as more and more people hear about it and acquire Bitcoin, the value of it will likely rise.

You can see the realtime value of your Bitcoins at Mt. Gox – the number in the top right is the current value in US Dollars, that is the price that people are actively buying Bitcoins for right now on an exchange market.

You can setup an online ‘wallet’ at Blockchain and send them to anyone in the world for free. To use the Bitcoins on the card, login to your new account and click on Import/Export. If you have a webcam, click Import Using Paper Wallet and hold the QR code on the right hand side of the card to the camera (the code that says Spend). If you don’t have a webcam, enter the long Private Key text into the Import Private Key text box instead. You can then go to the Send Money tab to send someone your Bitcoins.

You can convert them back to US Dollars at anytime. Coinbase and Mt. Gox that allow you to buy and sell Bitcoins and withdraw or deposit US dollars back into your bank account.

More Details About Bitcoin

The system was first described in Satoshi Nakamoto’s 2008 Bitcoin whitepaper, which was posted to a cryptography mailing list, and the Bitcoin open source project itself was founded on January 3, 2009. For its first two years, it slowly expanded its user base, until it was mentioned in an article on Slashdot in late 2010, which brought media attention and a rapid increase in prices as Bitcoin. Since its inception, it has grown to a size of over a million users and its 8.5 million currently existing units are altogether worth tens of millions of dollars.

Bitcoin’s decentralized database secures transfers between accounts using a mathematical algorithm known as digital signatures and prevents a problem known as double-spending — sending the same Bitcoins to two different people — by broadcasting all transactions to a network which keeps track of what Bitcoins have been spent, and synchronizing this information to every Bitcoin client.

A Technical Explanation of Bitcoin

Bitcoin is an agreement amongst a community of people to use 21 million secure mathematical tokens–“bitcoins”–as money, like traditional African and Asian societies used the money cowry. Unlike the money cowry:

there will never be more bitcoins

they are impossible to counterfeit

they can be divided into as small of pieces as you want

and they can be transferred instantly across great distances via a digital connection such as the internet.

This is accomplished by the use of powerful cryptography many times stronger than that used by banks. Instead of simply being “sent” coins have to be cryptographically signed over from one entity to another, essentially putting a lock and key on each token so that bitcoins can be securely backed up in multiple places, and so that copying doesn’t increase the amount you own.

Because bitcoins are given their value by the community, they don’t need to be accepted by anyone else or backed by any authority to succeed. They are like a local currency except much, much more effective and local to the whole world. As an example of how effective the community is at “backing” the bitcoin: on April 4th 2011 30,000 bitcoins were abruptly sold on the largest BitCoin exchange, consuming nearly all “buy” offers on the order book and dropping the price by nearly 1/3. But within a couple of days, the price on the exchange had fully rebounded and bitcoins were again trading at good volumes, with large “buy” offers slowly replacing the ones consumed by the trades. The ability of such a small economy (there were only 5 million out of the total 21 million bitcoins circulating then, or about 3.75 million USD worth at then-current exchange rates) to absorb such a large sell-off without crashing shows that bitcoins were already working beautifully.

What problem BitCoin solves: Mathematically, the specific implementation of the bitcoin protocol solves the problem of “how to do all of the above without trusting anyone“. If that sounds amazing, it should! Normally a local currency has to trust all kinds of people for it to be able to work. So does a national currency. And in both cases, that trust is often abused. But with BitCoin, there’s no one person who can abuse the system. Nobody can print more money, nobody can re-use the coins simply by making a copy, and nobody can use anyone else’s coins without having direct access to their keys. People who break its mathematical “rules” simply end up creating a whole different system incompatible with the first. As long as these rules are followed by someone, the only way BitCoin can fail is for everyone to stop using it.